Posted by: Daryl & Wendy Ashby | June 8, 2010

Analyzing Past Rate Increases

BMO Capital Markets recently made some interesting observations about the Bank of Canada’s rate hike tendencies.

Despite a limited sample size, BMO listed the following common traits from prior rate increase cycles:

  • BoC rate hikes come in “clusters, moving across a minimum of two consecutive announcement dates. (If this holds true the BoC will raise rates again on July 20.)
  • 84% of the past 25 rate increases have been 25 basis points
  • The BoC has often paused its rate hikes during past tightening cycles–sometimes more than once in a given cycle
  • The BoC has shown it will tighten even with core CPI inflation below its 2% target (That’s largely because the BoC tries to anticipate inflation and because it takes roughly a year or more for rate hikes to work through the economy.)
  • Rates rose an average of 200 basis points over 18 months in the past four cycles 

Rate-Hike-Cycle

(Chart via BMO Capital Markets, Author: Michael Gregory, CFA, Senior Economist)

BMO says the Bank of Canada typically sets policy after heavy consideration of five “C’s:”

  1. Core CPI (inflation)
  2. Canadian dollar
  3. Commodities
  4. Cross-border exports (to the U.S.)
  5. Crises (economic, financial, or geopolitical)

That last “C” happens to be a factor today, courtesy of the European debt crisis. Nonetheless, BMO says: “We judge the Bank’s scale will eventually tip to the domestic data side, and the new tightening cycle will toe the stylized line.”

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